USD/MXN Rises on Weak Dollar

The Mexican peso strengthened 0.3% on Friday, trading around 17.31 as markets focused on geopolitical developments, including US–Iran negotiations. Uncertainty in the Middle East, particularly risks around the Strait of Hormuz, continues to support a geopolitical risk premium. The US dollar remains under pressure as US inflation stays broadly in line with expectations and the Federal Reserve maintains a cautious, data-dependent stance, limiting Treasury yield upside. At the same time, resilient but uneven US growth keeps markets balanced between inflation and slowdown risks. Risk appetite supports emerging market currencies, with the peso benefiting from strong carry appeal and a wide interest rate differential versus the US. USD/MXN is down 14.79% this year, reflecting dollar weakness and sustained inflows into Mexican assets.

The Mexican peso has soared toward the 17.4 per US dollar mark, reaching an over 1-month high as a global shift away from safe havens followed President Trump’s decision to delay infrastructure strikes by two weeks. Risk appetite has surged following the plunge in oil prices which mitigates the threat of an energy-driven inflation shock for the Mexican economy. Despite this external relief, Banco de México remains in a complex position after its Governing Board recently lowered the target interest rate by 25 basis points to 6.75% in a surprise 3-2 split decision. While core inflation has remained relatively stable near 4.46% the latest Banxico survey shows that private sector analysts have revised 2026 headline inflation expectations upward to 4.21%. Markets are now pricing in a potential final rate cut to 6.5% later this year as policymakers balance upside inflation risks against a domestic manufacturing sector that has faced persistent contraction.

The Mexican peso has strengthened past the 17.8 mark as the currency capitalized on a broader retreat of the US dollar amid a Pakistan-brokered 45-day ceasefire proposal in the Middle East. Consequently, risk appetite recovered as investors anticipate a potential truce and the reopening of the Strait of Hormuz which would mitigate the threat of a systemic energy price shock. High domestic interest rates also continue to support the currency with Banxico expected to maintain a restrictive stance as inflation is projected to end 2026 above target near 4% in the latest Banxico survey. The move followed a dovish shift from Banco de México as it resumed its easing cycle with a 25 basis point rate cut to 6.75% in a split decision while signaling the possibility of one additional cut amid concerns over slowing economic activity and widening rate differential expectations. Markets now focus on President Trump's looming Tuesday deadline for potential strikes on Iranian infrastructure.